A surprise drop in eurozone inflation is helping the continent gain a head start on lower interest rates, ahead of its long-dominant US counterparts. Now, businesses across the country are starting to realize that they can gain some benefits of their own by taking advantage of these unusual dynamics.
Bank of America research shows that €30 billion ($32.5 billion) of EU bonds were issued to US firms in 2024.
This effect, called a “reverse Yankee,” could break records for credit flows from Europe to the United States to American companies by the end of the year.
The renewed interest in European debt is being fueled by diverging monetary policies between the US and Europe, the latter of which has surprised inflation with a rapid slowdown.
Eurozone consumer price inflation fell to 2.4% in March, close to the ECB’s 2% target.
Meanwhile, in the US, inflation is becoming increasingly difficult to control, falling to 3.4% in April.
Several European banks took steps to cut interest rates ahead of the Fed, ending a streak of first-mover status for the United States that has persisted since the turn of the century. The eurozone is expected to cut rates in June.
The trend is expected to help Europe’s economy overcome some differences with the US economy, where consumer spending is expected to be hit by months of higher borrowing costs.
Investors expect the divergence to widen through the end of the year, with borrowing on the continent expected to become cheaper.
“The creation of euro debt, both organic and synthetic, by US corporations with net investments in the euro area has become more attractive due to the widening interest rate differential between the US and the euro and the higher benefits of exchanging interest costs for euros,” they write. authors.
While the current economic climate is driving increased interest in US debt issuance in Europe, the reverse Yankee has been picking up pace for years.
In accordance with morning StarThe stronger dollar has boosted the attractiveness of buying European firms, which is partly financed by more favorable European bonds.
US debt vs euro
The US, historically not a country that has worried about its debt levels, is facing a reckoning on its Covid-era borrowings.
The stimulus, introduced to stave off the effects of the restrictions, was followed by Joe Biden’s giant Inflation Reduction Act (IRA), which increased the national debt to 121% of GDP.
Analysts are now concerned that prolonged high debt levels could discourage investors from issuing US bonds.
Fed Chairman Jerome Powell said the US needs to have an “adult conversation” about government debt levels, while JPMorgan CEO Jamie Dimon warned of a “rebellion” among investors who typically issue dollar-denominated debt.
Why is it important
However, not all is rosy on the continent.
European countries, especially France, are also facing elevated debt levels that threaten to hit their credit ratings.
France faces lower levels of economic growth than the United States, making it difficult for investors to justify confidence in the country’s debt.
But for now, Europe’s increasingly attractive monetary situation appears to be allaying those investors’ fears, guaranteeing the continent a record year from their friends across the Atlantic.